As the FT first reported yesetrday, in a dramatic development for Sino-US relations, Trump picked Peter Navarro, a Harvard-trained economist and one-time daytrader, to head the National Trade Council, an organization within the White House to oversee industrial policy and promote manufacturing. Navarro, a hardcore China hawk, is the author of books such as “Death by China” and “Crouching Tiger: What China’s Militarism Means for the World” has for years warned that the US is engaged in an economic war with China and should adopt a more aggressive stance, a message that the president-elect sold to voters across the US during his campaign.
In the aftermath of Navarro’s appointment, many were curious to see what China’s reaction would be, and according to the FT, Beijin’s response has been nothing short of “shocked.” To wit:
The appointment of Peter Navarro, a campaign adviser, to a formal White House post shocked Chinese officials and scholars who had hoped that Mr Trump would tone down his anti-Beijing rhetoric after assuming office.
“Chinese officials had hoped that, as a businessman, Trump would be open to negotiating deals,” said Zhu Ning, a finance professor at Tsinghua University in Beijing. “But they have been surprised by his decision to appoint such a hawk to a key post.”
There were two dogs that did not bark this year. The Japanese yen, which despite negative interest rates and an unprecedented expansion of the central bank’s balance sheet, strengthened 15% against the dollar. The yen has been the strongest major currency, and the third strongest currency in the world behind the high-yielding Brazilian real, recovering from last year’s drop, and the Russian rouble, aided by a rebound in oil.
The other dog that is not barking is China. In August 2015, and again at the start of is year, the decline of the yuan and weakness in Chinese equities reverberated around the world. It was even cited as a factor influencing the timing of the Fed removing accommodation. Since early this year, the yuan has continued to depreciate, and Chinese shares are among the worst performers. Yet it has not been a disruptive force.
The Shanghai Composite has fallen 11.5% this year. MSCI Emerging Market Index has gained about 14%. MSCI Asia-Pacific Index has advanced roughly 6% this year. MSCI’s World Index (developed markets) is about 4% higher on the year.
China’s reserves have fallen by about $134 bln in the first nine months of the year. This understates the capital outflow as China also recorded a $134 bln current account surplus in H1 16 and a trade surplus of $146 bln in Q3. Brad Sester of the Council on Foreign Relations, estimates that China may have experienced outflows of $95-$100 bln in Q3. As China sells reserves, it is selling US Treasuries. The latest country breakdown covers the month of August. US data, which is not necessarily comprehensive, estimates that China sold $33.7 bln of Treasury Securities in August after selling a combined $25.2 bln in June and July.